Saturday, February 28, 2015

Goodbye big bang reforms, hello economic growth

One of the most striking points of this year's Economic Survey relates to 'big bang reforms'. For years, commentators have been bemoaning the lack of political will to push through such reforms. IN the run-up to the budget, they have been warning the government that it will be judged on how well it does on this account. The Survey pours cold water on such hopes and explains why:

Given the expectations surrounding the upcoming budget, one question needs to be addressed head-on: Does India need Big Bang reforms?Much of the cross-country evidence of the post-war years suggests that Big Bang reforms occur during or in the aftermath of major crises. Moreover, Big Bang reforms in robust democracies with multiple actors and institutions with the power to do, undo, and block, are the exception rather than the rule.India today is not in crisis, and decision-making authority is vibrantly and frustratingly diffuse.

This is refreshingly candid stuff- and one hopes it will put an end to the 'big bang reform' cottage industry. It's not just that such reforms are not politically feasible. One could argue that the past pace of reform is perfectly consistent with rapid economic growth in India. Over ten years of the UPA regime, few major reforms occurred- and we saw among a period of the highest growth ever.  In the slow growth period of the last three years when the world was still feeling the impact of the financial crisis, India grew at 6.7%. The Indian economy is now set to grow at over 8% in 2015-16. We should not be surprised. Reform or no reform, we can expect an investment rate of 32% or more. This should translate into growth of around 8%.

The Survey should have spelt out the implications for fiscal policy of  the imminent return to the high growth path. Whenever the economy is growing at over 7% and 8%, the fiscal deficit problem tends to disappear- the fiscal deficit to gdp begins to decline and fall within an acceptable range. The debt to gdp ratio also declines. If we are looking at double digit growth in the medium term, we can tolerate a fiscal deficit to gdp ratio of over 3%. The finance minister need not have been apologetic at all about deferring the year for meeting this target by one year, as he has in the budget. He might have been bolder on the spending front and given a greater boost to public investment than he has.

More on the growth and India's fiscal problem in my article here.


IBPS said...

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Anonymous said...

Hi Prof.,

Revenue mobilization remains a challenge. Would like to know if the schemes on Gold Monetization etc. would work.

I would have hoped that the tax free bonds for infra. would have carried some tax rebate. At least 50% of the amount invested could have been exempted. only then people would have invested wilfully. It does not look attractive now.